By Taxpayer<\/p>\n

<\/a>As a tax concept, \u201centertainment\u201d can be relevant not only to fringe benefits tax (FBT), but also to income tax and even goods and services tax (GST). For a business, whether a business expense is \u201centertainment\u201d will generally also determine whether the cost is deductible. If the expenditure can be shown to be directly connected with the carrying on of a business, it should be deductible. So could your client be missing out on some \u201centertainment\u201d business deductions?<\/p>\n

The example of someone taking a client out to lunch can certainly be shown to be in connection with a business. However, there is still a lurking danger within the relevant sections of the tax law that says that if such an expense also represents \u201centertainment\u201d, by the Australian Taxation Office (ATO) view, then that cost can be taken out of the deductibility equation.<\/p>\n

The definition of \u201centertainment\u201d
\n<\/strong>The term \u201centertainment\u201d is defined in income tax law (section 32-5<\/a>), and both FBT and GST leverages off the income tax definition. The relevant legislation simply defines entertainment as meaning \u201centertainment by way of food, drink, or recreation\u201d. The ATO adds slightly to this by also including transport and accommodation costs relevant to the consumption of said food and drink. But as a guide to the application of tax, this definition is really not very helpful.<\/p>\n

Realising that this definition came up short for giving taxpayers the required guidance on such deductions, the ATO issued a ruling in 1997 to give taxpayers a better, and more applicable, understanding of the concept of entertainment (TR97\/17<\/a>). This ruling suggests that when considering whether the consumption of food and drink is entertainment \u2013 and therefore whether it is non-deductible or deductible, depending on the analysis of the expenditure \u2013 the ATO will look at it in the context of four questions.<\/p>\n

They are four very simple questions \u2014 why, what, where and when. And the viability of a claim does not live or die on the strength of any one of the answers to those questions, but on a balance of the answers. If an expense is deemed to be entertainment, it is of course non-deductible for income tax purposes and no GST credit is ascribed to it. If it is not entertainment and therefore a business cost, it is deductible.<\/p>\n

Looking at the \u201cwhy\u201d question first, we must ask: is the consumption of the food and drink tied to a social reason, or is there a business reason? We can use the example above of taking a client out to lunch, which is underpinned by a solid business reason. However, the next answer needs to back this up.<\/p>\n

The answer to \u201cwhat\u201d should bear out the reason assumed for lunching with a client, meaning that a lavish four-course meal is out of the question. The logic is that if the parties are meeting for business reasons, the food and drink will be no more than functional. So if we\u2019re looking at sandwiches or muffins, with coffee or orange juice, the \u201cwhat\u201d bears out the \u201cwhy\u201d, and the deductibility of the expense looks safer. Note, however, that if alcohol is involved, the \u201cwhat\u201d answer will have much less credibility.<\/p>\n

Generally, the \u201cwhy\u201d and the \u201cwhat\u201d must be satisfied in order to make a successful claim for deductibility, but the next question \u2013 \u201cwhere\u201d \u2013 can undermine the direction of the logic. If the food and drink is consumed on the business\u2019s premises, naturally there is more weight to the argument that the expense is a business cost. Being at a restaurant or caf\u00e9 does not necessarily count against the viability of the claim, but the answer to the next question \u2013 \u201cwhen\u201d \u2013 helps if the food and drink expense is incurred during business hours.<\/p>\n

Wriggle room for entertainment claims
\n<\/strong>There are some specific expenses that are generally accepted as deductible. Refreshments made available at a presentation to staff on business premises (such as sandwiches, biscuits and tea or coffee) are generally accepted as a business cost, and deductible. The ATO views this sort of food and drink as sustenance, or employee amenities. And again, alcohol has no place in tax deduction considerations in these situations.<\/p>\n

Another scenario where food and drink would never be considered entertainment by ATO standards is where expenditure is incurred by an employee who is travelling away from home. In this situation also, there is less of a requirement that the items consumed be merely functional.<\/p>\n

Within the tax law that denies the deductibility of the costs of food and drink that are entertainment is a proviso that can be called \u201cpromotion and advertising\u201d. So if a business hosts a product launch, for example, and serves up a spread of various food and drinks for the guests, including alcohol, the costs of this entertainment will be deductible. The food and drink are relevant and incidental to the promotional event of the business.<\/p>\n

Another proviso within the entertainment deduction prohibition rules is where food and drink are consumed incidental to attendance at a seminar of at least four hours\u2019 duration. Clearly, the time frame is important to allow for an unchallengeable deduction claim. Note also that the word \u201cseminar\u201d covers events such as workshops, training sessions, conferences, lectures and so on.<\/p>\n

Assessing the strength of deduction claims
\n<\/strong>When determining whether an expense is \u201centertainment\u201d, and therefore deductible or non-deductible, the taxpayer\u2019s position is more assured by having a \u201creasonably arguable position\u201d, as the ATO puts it, which can be arrived at by examining the answers to the questions spelled out above.<\/p>\n

Naturally, many taxpayers are wary of not crossing a line when it comes to making tax deduction claims, as are many tax practitioners. The ATO has power to dole out various penalties and fines, which can be a disincentive in situations where the outcome is not certain. However, it is equally the case that taxpayers might be missing out on some very legitimate tax deductions by merely not exploring their books and taking too conservative a view that certain elements of their expenditure is off the table.<\/p>\n

It will of course depend on the circumstances, but if you suspect that some of your clients could have \u201centertainment\u201d deductions their business is missing out on, it may pay to have another look at their books. Over the course of a year, these otherwise unidentified pockets of expenditure could add up to a tidy sum.<\/p>\n

 <\/p>\n

Source:\u00a0Tax & Super Australia<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By Taxpayer<\/p>\n

As a tax concept, \u201centertainment\u201d can be relevant not only to fringe benefits tax (FBT), but also to income tax and even goods and services tax (GST). For…<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":""},"categories":[3],"tags":[34,35,23],"acf":[],"_links":{"self":[{"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/posts\/1614"}],"collection":[{"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/comments?post=1614"}],"version-history":[{"count":1,"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/posts\/1614\/revisions"}],"predecessor-version":[{"id":1616,"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/posts\/1614\/revisions\/1616"}],"wp:attachment":[{"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/media?parent=1614"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/categories?post=1614"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/tags?post=1614"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}